Cash value life insurance is a type of life insurance that combines the savings component of permanent life insurance with the death benefit that's standard for all types of life insurance.
Permanent life insurance policies remain in force for the lifetime of the insured, allowing you to access your cash value as you wish and pass along the policy's death benefit to your beneficiaries when you pass away.
While there are many different types of life insurance, cash value has some unique features that make it more attractive in some situations than other forms of life insurance. For instance, you can tap your cash value for retirement needs, tax-advantaged investing, paying off debt or emergencies.
While your permanent life insurance policy's cash value may be versatile, you should also note some drawbacks related to costs and inheritance. Let's discuss cash value life insurance, its main features and how it can benefit retirees.
What Is Cash Value Life Insurance?
Cash value life insurance is another name for permanent life insurance, which means the policy remains in effect for your entire lifetime. This type of life insurance policy comes with a built-in savings account that allows you to pay premiums that go toward three items:
- Death benefit: Your beneficiary or beneficiaries will receive this amount when you pass away.
- Cash value: A savings account that allows you to grow money over time (depends on the type of cash value life insurance, costs and returns).
- Costs: Insurers take a portion of your premiums to pay for their costs.
What Can You Do with the Cash Value?
Cash values in life insurance policies are usable after they've built up enough value. You can access your cash value by making a partial withdrawal, taking a loan against the cash value, surrendering the policy or even selling your policy in a life insurance settlement.
Once you decide how you will access your cash value, you can use it as an added income stream for everyday expenses. This can provide permanent life insurance policies with added financial resources in retirement.
You can also invest money through cash value life insurance with tax advantages. The money invested in the cash value allows for tax-deferred growth, which means it can serve as another tax-advantaged investment vehicle outside of your retirement accounts for growing your net worth.
In addition, you can access these investments before age 59.5, which could provide liquidity that your retirement accounts may not. This is why cash value policies work well for high-income earners who have maxed out their retirement account contributions.
Because of the tax-deferred growth potential granted by these policies, contributions you make to them can translate to additional tax-deferred savings.
Cash Value Life Insurance vs. Term Life Insurance
Permanent life insurance policies have features that distinguish them from term life insurance policies. For one, permanent policies provide a cash value that should grow with time, though costs, returns and investment selection vary based on the type of permanent life insurance.
Permanent life insurance policies also last the insured's entire lifetime, while term life policies only last for a stated period, generally 10, 20 or 30 years.
As you evaluate whether you need cash value life insurance or a simple term life insurance policy, the answer will likely depend on how much risk you wish to take and the financial flexibility you feel you need.
Should You Get a Cash Value Insurance Policy?
Cash value insurance policies allow you to build a savings account as you pay premiums. These types of policies work well for high-income earners who've maxed out their retirement account contributions and are still seeking a way to save money in a tax-deferred manner.
Term-life insurance policies, on the other hand, can provide a bare-bones approach to ensuring a death benefit for dependents who rely on you for support. They have no cash value component, but they can offer lower premium payments in exchange for this simplicity.